Tax Type
Corporation Income Tax
Description
Returns of affiliated corporations; Consolidated returns
Topic
Returns and Payments
Date Issued
04-29-1993
April 29, 1993
Re: §58.1-1821 Application; Corporation Income Tax
Dear******************
This will reply to your letter of March 4, 1993 in which you seek correction of corporation income tax assessments for **************(the "Taxpayer").
FACTS
The Taxpayer filed a consolidated Virginia corporation income tax return. On audit, it was determined that several subsidiary corporations did not have nexus with Virginia, and they were removed from the Virginia consolidated return. You protest this adjustment, maintaining that these corporations should remain in the consolidated return.
In a previous ruling, it was determined that the auditor properly removed the corporations from the consolidated return because the subsidiaries had no property, payroll or sales in Virginia and, therefore, had no income from Virginia sources. See P.D. 92-238 (11/16/92).
You request reconsideration of the prior ruling and have submitted additional information to support the Taxpayer's original filing position.
DETERMINATION
The additional information you have submitted states that during the period of audit, the major officers of the subsidiaries were also officers of the Taxpayer. These individuals worked at the Taxpayer's Virginia headquarters and were on the payroll of the Taxpayer. You maintain that the overlapping officers, either directly or indirectly through the Taxpayer's employees, managed the operations of not only the Taxpayer, but also the subsidiaries. You have provided a list of activities which the officers and/or employees of the Taxpayer performed in Virginia for or on behalf of the subsidiaries. You contend that these activities performed by the officers in Virginia for the subsidiaries are sufficient to establish nexus for the subsidiaries in Virginia, making them eligible to be included in the Taxpayer's consolidated Virginia corporation income tax return.
To be included in a Virginia consolidated income tax return, a corporation must be subject to Virginia income tax, if separate returns were to be filed. See Virginia Regulation (VR) 630-3-442. Generally, corporations organized under Virginia law and foreign corporations having income from Virginia sources are subject to Virginia tax.
Under VR 630-3-302, if the entire business of a corporation is not deemed to have been transacted or conducted within Virginia, then the "income from Virginia sources" means that portion of the corporation's Virginia taxable income resulting from the allocation and apportionment formulas. In this case, the subsidiaries did not conduct their entire business in Virginia. (In fact, the issue is whether the subsidiaries conducted any business in Virginia.) Therefore, the applicable apportionment formula must be considered to determine if the subsidiaries had income from Virginia sources.
Based on the auditor's workpapers and the additional information provided, it is clear that none of the subsidiaries in question have income from Virginia sources. This is evidenced by the fact that the activities enumerated in your supplemental documentation are not sufficient to create a positive property, payroll or sales factor for any of the subsidiaries. The additional information you have supplied provides no evidence that the subsidiaries had property or sales in Virginia. The only apportionment factor which could possibly be affected is the payroll factor.
The department has previously ruled that wages paid by a parent corporation are not included in the payroll factor of a subsidiary, despite bookkeeping allocations by the parent corporation to the subsidiary for a portion of the expense. See P.D. 90-17 (1/11/90) (copy enclosed).
There is a strong presumption that total wages reported to Virginia for unemployment compensation purposes represent compensation paid or accrued in Virginia. See VR 630-3-412(C) (copy enclosed). The Virginia Unemployment Compensation Act (Va. Code §60.2) does not provide for any type of common paymaster arrangement. Each employer is separately liable for taxes on its wages. Accordingly, a common paymaster arrangement is not recognized for purposes of determining Virginia apportionment.
All Virginia compensation for the officers was reported by the Taxpayer for Virginia Unemployment Compensation purposes; no compensation was reported by the subsidiaries. You now attempt to attribute a portion of that compensation to the subsidiaries for corporation income tax purposes. The department will not allow a taxpayer to attribute wages to one corporation for Virginia Unemployment Compensation purposes and to another corporation for income tax purposes; reporting must be consistent. The manner of reporting with the Virginia Employment Commission (VEC) is not inconsequential, as the experience rating of each taxpayer determines its tax rate. Because no compensation was reported to the VEC by the subsidiaries, they have no payroll factor in Virginia.
Furthermore, services provided by employees of other corporations and stewardship services performed by officers of the Taxpayer do not constitute compensation paid by the subsidiaries. And while you contend that the overlapping officers performed services in Virginia for the subsidiaries, it is clear from the VEC reports that the overlapping officers performed these functions in their capacity as employees of the Parent, not as officers of the subsidiaries.
Therefore, I find that you have failed to overcome the burden of proof that the subsidiaries had a positive payroll factor for the years in question. Because the subsidiaries do not have a positive apportionment factor, they do not have income from Virginia sources. Consequently, they are not subject to Virginia income tax and are not eligible to be included in the consolidated Virginia return.
Accordingly, the subsidiaries were properly removed from the Taxpayer's consolidated Virginia corporation income tax return. The assessments are correct as made and are now due and payable. You will shortly receive an updated bill with interest accrued to date. The bill should be paid within 30 days to avoid the accrual of additional interest.
Sincerely,
W. H. Forst
Tax Commissioner
OTP/6692F
Rulings of the Tax Commissioner